Sales in recessions

Sales figures are often used as evidence of the general health of the economy. In a recession, any rise in high street sales is quoted by government ministers as evidence of the increase in consumer confidence that is the first step on the road back to economic growth.

In free market terms, sale figures reflect the state of local market forces at any one place and at any one time. They show the amount of a product that the public wants to buy at the current price.

To a large extent, this is true. At times of falling sales, high street shops are forced to reduce prices - with out-of-season sales, special offers and even "closing down" sales. Newspapers are full of advertisements for special offers on consumer durables, cars, for example, or computers and video recorders.

The reason for these goods being the ones that are most frequently discounted in times of recession is that they are the most expensive in terms of their opportunity cost - their relative value to buyers compared to the value of alternative goods and services on which they may want to spend that same amount of money. If you have £X, you can buy a CD player or go on a short holiday, but you cannot do both.

Even more important, perhaps, is the consumer's fear of his or her personal future. In recessions come job losses, with job losses comes an increased reluctance to spend; it is expensive luxuries such as videos that are the first items to be cut from household budgets. People feel the need to save against the possible future loss of income. In recessions, a greater proportion of the public's income is saved than in times of economic growth.

The effect of all this on manufacturers can easily be seen. Falling sales lead to production cut-backs. This results in the under-capacity of plant and machinery. Since fixed overheads remain basically the same, other ways of cutting back on costs and thus of reducing prices have to be found. Almost always, this is achieved through cutting back on jobs.

But therein lies the problem. Although, for a manufacturer, cutting back on the workforce is a relatively simple short-term solution, it is not necessarily the best long-term strategy. In certain key industries, skilled labour is hard to find - and keep. the job market can fluctuate as erratically as the consumer market. There are fashionable jobs and unfashionable jobs. There are glamorous jobs and jobs that nobody wants to do. These trends are reflected in the kind of further training chosen by school leavers and in the kinds of further education courses on offer.

Manufacturers, therefore, tend to wait longer before laying off any staff than they would do if they were obeying market forces. To keep these workers fully occupied, companies may have to depress prices artificially to a point lower than that demanded by prevailing market forces, merely in order to maintain production levels.

It is almost certainly true, therefore, that there are forces at work at the time that an economy is entering a recession that distort the real value of sales figures. It may also be true that, on the way out of a recession, or in a boom period, the competition for scarce labour has the same distorting effect.

http://www.linguarama.com/ps/192-1.htm